Trickle-Down New York

The effects on the city of a drastically smaller Wall Street.

It can be hard to spot turning points in history until long after they occur. But sometimes they smack you in the face.

“Wall Street is like the auto industry in the seventies, which had a product that was dangerous and exploded on impact,” says Nicole Gelinas, a fellow of the Manhattan Institute. “Many people have started to think that the industry has grown too big and needs to shrink. That will be very painful for the city.”

More so than we might think. Half a century ago, Wall Street investment banks such as Goldman Sachs were much smaller, and New York had many other industries. But when the bottom fell out of the city’s economy in the seventies, it was Wall Street that came to the rescue. The “greed is good” era was halted briefly by the 1987 crash, but that was only the prelude to Wall Street’s relentless growth since. You have not just imagined it: Wall Street is bigger than it ever has been.

The financial sector’s profits now account for over 4 percent of the national income. Even in 2007, when the credit crisis started to hit, banks and securities firms in the city paid out $33 billion in bonuses. This river of money has enabled Wall Street’s bankers, private-equity bigwigs, and hedge-fund managers to shape New York in their own image.

Luxury retailers flourished: Tiffany & Co.’s U.S. sales rose 17 percent just in the first half of 2007. The city’s new high-end condominiums appeared immune to the national housing turmoil. Fifteen Central Park West alone now houses more than a half-dozen Goldman employees (including CEO Lloyd Blankfein), four Lehman heavyweights (including its CFO), two Deutsche Bankers, plus former Citigroup CEO Sandy Weill and hedge-funder Daniel Loeb.

Even New Yorkers who had no direct connection to Wall Street felt this wealth trickle down. Maybe their jobs depended on it: Each of the 188,000 jobs on Wall Street last year is said to support at least two others in the city—nannies, coffee baristas, dry cleaners. Or they felt it in the spruced-up parks, nonstop museum expansions, or new hospital wings. Last year Weill gave Cornell Medical College $250 million. In May, Stephen Schwarzman, chief executive of the private-equity group Blackstone, contributed $100 million to the New York Public Library.

All this proximity to extreme wealth—and the corollary sense that New York has been fashioned by and for billionaires—is now at risk, along with the budgets of both the city and the state. “The city has been way too reliant on Wall Street for far too long,” says Jonathan Bowles, head of the Center for an Urban Future. “Everyone knows that, but nothing has really changed.”

New York has bounced back from downturns before, and the fact that most of Lehman has been swallowed by Barclays is not, in itself, the end of the world. Wall Street firms, like Hollywood studios, have a history of taking others’ capital and carrying on much as before. And the U.S. government’s latest plan to buy up bad securities could be a larger helping hand for New York than the Chrysler bailout in 1979 was for Detroit.

But even if this downturn is like the one earlier this decade, Wall Street stands to shed 40,000 jobs. (Eleven thousand jobs had been lost before the events this past week, and Lehman, Merrill, and AIG together have 29,000 employees in the city.) If, instead, last week was the beginning not of a cyclical crisis but of the permanent shrinkage of Wall Street, the job loss could easily be far more.

Gelinas suggests that we may be witnessing something like the decline of New York’s manufacturing base in the seventies. The geographic imperative of doing business in New York is less obvious. Where capital and growth opportunities do exist, they’re more likely abroad. Barclays’ partial takeover of Lehman showed which way the wind is blowing, and last week Morgan Stanley was negotiating with China Investment Corp for a possible capital infusion.

“There is a trend of wealth and head count moving from these shores to other parts of the world, such as London, Dubai, and Hong Kong,” says John Studzinski, head of mergers and acquisitions at Blackstone. It’s now easy, if unsettling, to imagine that when the market calms, the remaining financial firms will have moved their head offices to other cities.

New York is, of course, used to fire and destruction, to being beyond salvation. It has been drained of cash and has refilled its coffers from new sources. It invented the term Wall Street crash but survived 1929, 1973, and 1987.

It will survive the first 21st-century financial crisis, too, but how, and with what degree of wealth?